Thursday, October 20, 2011

Index Based Salaries

Prices change. Some change every day, others may be once a month. Salaries are fixed, unless company decides to change it.

When government decides to increase petrol prices, price of almost everything increases because almost every business depends on transportation. But salaries don't change. When SBI increases cash reserve ratio or base rate, EMI increases, production decreases but salaries don't change.

It is kind of unfair that everyone in business can increase/decrease prices either based on market conditions or increase/decrease in cost of doing business but salaried people don't have that choice. The only choice they have is - talk to your manager or find a new job.

What if salary was a function? Say Hari Sadu has a home loan, drives a car and has children studying in school. If his salary was linked to his home loan rate, cost of petrol and cost of education, he would be a very happy employee. Just like businesses can adjust their prices, if salaries could be adjusted the same way, it would create a much faster feedback loop for the economy to adjust to the new conditions. If a business decides that it cannot support salary function of some employee and wants to decrease his salary, it will come out clean and open. The current system of things, simply says things are same (salary stays the same) but actually employee is taking a hit and it stays unsaid, unacknowledged. A 10% salary raise at yearly performance evaluation might be less that inflation or much much less than "impact of inflation" for a given employee. In this new system, raise is a raise, it gives employee more spending power.

This is obviously a bad move for the companies because it makes one of fixed costs of business, variable. But what it also does is that it brings transparency. Just as businesses understand and adjust to prices of other businesses, it makes sense to understand and adjust to impact of prices on your employees. If home loan rate increase by HDFC is eating into margins of Wipro or Infosys, they are in a better position of negotiate with HDFC than each employee on his own and then may be HDFC will figure out a deal where Wipro or Infosys charges less for software. I guess all I am talking about is businesses being more people aware than money aware, because money in itself can do nothing, only people can.